How To Understand Credit Reports

Is Your Credit Score Helping or Hurting You?

Financial uncertainty, foreclosures, and tightened lending requirements define the life of many Americans today. Credit reports and credit scores have always been important but it's more crucial than ever for you to understand how credit works. Your credit history can be your friend, opening many doors for you. But if misused, it can make your life difficult, causing doors to slam in your face, as you helplessly watch. Having credit is a privilege. You should protect it just as you protect your good name. When talking to a creditor, you are at a disadvantage if you do not know how credit works. Read this and you are off to a good start.

  1. There are three major credit bureaus in the U.S. Basically, they are all the same, but there are some differences and the reports are a different format. The bureaus are: Experian, Equifax (formerly TRW) and Trans Union. Creditors can decide which bureau to use. Some order all three or a combination report--others order two, while some may only require one report from one bureau.
  2. Credit bureaus collect, assemble and distribute information regarding how you handle your financial obligations. Most lenders report credit activity to the credit bureaus but not all do. They can choose which ones or how many to report to, just like they do when ordering credit reports. Information reported includes lender name, account number, highest amount of credit, payment amount, balance owing and how each payment is made (on time, 30 days late, 60 days late, 90 days late).
  3. The power is in the score. Each bureau calculates your number. The scores range from the high 300s to the low 800s. If you have a good payment history and the accounts are the same with all three bureaus, your scores should be similar. When creditors do not report to all three, your scores can vary, especially if you have not made payments on time or you have other credit issues.
  4. You don't get to pick your score. Most creditors base their credit decisions on the middle score or some type of average. With a couple, they usually pick the middle score for both and then use the lower of these to qualify them for the loan. A spouse with lousy credit can cause a creditor to deny your application, even if the other spouse has excellent credit scores. Your score changes as your credit history changes and is calculated each time someone new requests your credit.
  5. Late payments are not the only factor in determining your score. If you do not make your payments on time, eventually the creditor will turn your account over to a collection agency. If the collection agency is unable to collect the amount due, it then becomes a charge-off. If it's an automobile, they repossess the car. If it's your home, they foreclose, forcing you to give up the property. Events like these often lead to bankruptcy. Individuals and companies can take out judgments against you, secured by your real estate. Many people do not realize that past due child support, alimony, and tax liens of all kinds are reported to the credit bureaus. All of these events significantly lower your score.
  6. Personal information is on the credit report. Your social security number, current and previous last names, addresses and employers plus telephone numbers are usually on the report. Some people do not realize that potential employers can pull your credit report before they offer you a job. Usually they have certain requirements you have to meet. So not only can bad credit lead to denied loans, it can also be the reason you do not get the job.
  7. Low credit scores can be improved. Creditors look at the most recent credit history, the last 12 to 24 months, depending upon the type of loan. For a mortgage loan, they usually want to review the past two years. If you have credit problems, the best thing to do is to bring all your payments current as quickly as possible. Continue to maintain a good payment record. Accounts can stay on your report forever. Derogatory credit, such as bankruptcy, is removed after ten years. Good credit does not erase bad credit but it does show the creditor that you are now current with your payments. Continue making payments on time and eventually your scores will start to go up.

In life, sometimes things happen which are beyond our control. Job loss, illness, divorce, an unstable financial economy, etc. can force individuals to make difficult choices. If that happens, it is best to be honest and up front with your creditors. Sometimes they can work with you. If not, try to put your life in perspective. You can restore bad credit but you cannot replace the love of family and friends.

Margaret is a Personal Life Coach, Writer, and Speaker. The owner of Life Transitions, she helps others build self-confidence and make positive changes in their lives. Her passion is creating more awareness about abuse, helping to change one life at a time. See her web sites

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